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Spirit Airlines: High Risk, High Reward

Mar. 10, 2020 7:45 AM ETSpirit Airlines, Inc. (SAVE)38 Comments
Zero Sum Gamer profile picture
Zero Sum Gamer


  • Spirit Airlines trading below book value after -50% plunge.
  • Stock is a risky bet with multiple unknowns, and a large potential payoff upon eventual coronavirus recovery.
  • Cautiously bullish at $20/share, even in reasonable $1 billion loss doomsday scenario.

After falling 50% since news broke of COVID-19 outbreaks in South Korea and Italy two weeks ago, Spirit Airlines (NYSE:SAVE) is now trading at 5 year lows and 75% tangible book value, as the market absorbs the implications of a coronavirus pandemic. If the company were to liquidate all assets immediately at market value, shareholders at today's prices would see sizable appreciation in capital...the problem is, no one wants to buy planes in this market. With news that German airliner Lufthansa is cutting capacity by up to 50% in the next few months, US airlines may be following suit, as the United States appears to be lagging Europe by a couple of weeks in terms of disease progression/reported cases (the argument can be made that the lag is actually non-existent since the US falls far short of European counterparts in number of people tested). Given the coronavirus black swan and Spirit's precipitous drop in market value in only two weeks, is it a buy for investors today? I am bullish, but cautiously so...as it stands, Spirit is a high risk/high reward play with multiple unknown variables that will crystallize in the days to come.

On one hand, Spirit looks like one of the riskiest bets in the airline sector, with a below investment grade credit rating of BB-/Ba3 that is matched only by American Airlines (AAL). However, in this unique environment, the criteria by which credit rating agencies assign their scores may not be fully relevant...for instance, fleet size and diversity of routes would not insulate an airline from a pandemic-related demand shock that is not localized. Looking at balance sheet data, Spirit appears well positioned to weather the coming storm, far more so than its peers: it currently holds a cash balance equal to 28% of its

This article was written by

Zero Sum Gamer profile picture
Investment style: buying great businesses at fair prices. Favorite sector: technology, due to massive competitive advantages, capital-light growth, cash rich balance sheets, and greatest potential to disrupt and cannibalize other industries. Time horizon: forever. Super interested in the rise of big data, quantitative investing, and how ordinary humans can still achieve alpha in a market increasingly dominated by machines

Analyst’s Disclosure: I am/we are long SAVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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